During an ill-advised fishing trip, two high-school buddies turned techies chat about the economy, and wonder whether consolidation is really the price of progress.
I recently took an ill-advised fishing trip up north with Mark, one of the few high-school buddies I’ve kept up with. I say it was ill-advised only because we didn’t pay close enough attention to the weather, and a cold snap had made fishing iffy at best. By the time we got up to the lake, the harbor was frozen over and the boat ramp onto the lake was glare ice. So we drove back south in search of open water and spent most of the weekend driving as a result. Still, the long drive gave us a chance to chat about big-picture issues. Mostly we talked about the topic everyone seems to discuss after they’re caught up on the weather–the economy.
Mark and I have shared a lot more than fish tales over the years. When I became editor of this publication in 1997, Mark was in the midst of developing a service organization for his small local computing company. Mark was one of my secret sources over the years, and the stories he told are all too familiar to regular readers. Pressure from direct merchants like Dell and mega-merchants like Best Buy eroded the margins in the hardware industry. The only way his company would survive was by emphasizing service, and charging for it. ComputerUser also felt this downturn. Our bread-and-butter advertisers were losing ground in what would become a long chain of closed local hardware retailers.
Fast-forward six years, and the local hardware business is in tough shape, to say the least. Shops that were once as common as coffee bars are now as rare as comic book stores. While computing has been hardest hit by competition from direct and mega-merchants, it is not the only industry to feel the pinch. Look around any small town and you’ll see consolidations everywhere: closed storefronts that once housed hardware stores, bakeries, meat markets, toy shops, book sellers, office and computing supply stores, and grocery stores. Coffee shops and bars have moved into some of these spaces, but many remain boarded up. Mark and I lamented this trend and debated what, if anything, could or should be done about it.
Some will say consolidation is the price of progress. Our economy depends on profits and productivity. As margins fall, the only way to grow profits is by reducing overhead. That means automating as much as you can; selling everything in volume; and keeping human capital costs down. The paradigm of this kind of business is Wal-Mart. It gets business by persistently lowering prices. It lowers prices by reducing human overhead, either through automation, overseas outsourcing, or wage and benefit reductions. It typically pays $9 an hour with very limited benefits to new full-time employees, and it uses as many minimum-wage part timers as it can.
A recent headline on CNN.com caught my eye. “Wal-Mart reports earnings of $2.08 billion for third quarter.” Other versions of the story led with the fact that the company missed its projections. Still others point out that despite missing projections, the earnings and profits for the quarter were both records. Worried investors sold Wal-Mart stock like crazy and the whole market went south with it. Record profits and earnings still resulted in Wal-Mart stock losing more than 2 dollars per share. The Dow lost around 150 points. Beyond the red graph for that day, the headline gave me a sick feeling. It’s hard to explain, but it’s comparable to the feeling I got in the late ’90s when Bill Gates reportedly made $8 billion in one year. I wanted to applaud his success, but I had this sinking feeling that it came at the expense of a lot of hard-working, honest folks.
Another seemingly unrelated story about Wal-Mart might seem more surprising to some. Wal-Mart recently announced plans to build a grande-hyper-mega-super store in Austin, Minn. Better known for the headquarters of Hormel, Austin is about 100 miles south of Minneapolis. The surprising part is that the good people of Austin protested the proposed new store in the streets. I can imagine Wal-Mart’s VP of new store placement, “Why do you resist? We only wish to increase quality of life.” Apparently, resistance is not futile, because Wal-Mart decided not to build its store after all. My own small town between Austin and Minneapolis placed a moratorium on superstores in general after Wal-Mart came into the mall and assimilated many of the downtown merchants, leaving our historic downtown similar to others across America–half full and in need of public funds to attract businesses.
Listen to the CEO of a major growing company in America and you will hear the name of Wal-Mart spoken with awe. I recently interviewed Dick Schulze, chairman of Best Buy. He said Wal-Mart is the gold standard against which not only retailers, but all companies judge their success. What he means is that costs are extremely low and volume is extremely high. A part of this is efficiency. The real information economy can be found in the distribution centers of retailers like Wal-Mart and Best Buy. Sophisticated wireless networking and state-of-the-art supply-chain systems can automatically track and deploy merchandise more efficiently than direct merchants can. But a bigger part of it is low compensation and offshore outsourcing.
Executives who don’t emulate Wal-Mart compete with it. And therein lies the biggest problem. To compete with Wal-Mart, they too have to pay low wages and provide next to nothing in benefits. Or, they can ship a major portion of their workforce overseas, where wages are even lower and benefits are nonexistent. The effects of Wal-Mart on our economy are pervasive. We are in the midst of a fairly strong economic uptick for corporations, except for that 6 percent jobless rate (at the time of writing). Of course, Wal-Mart likes unemployment because it can get better employees for less money. This is why I call the new economy the Wal-Mart economy. The trouble is, if every big company behaves like Wal-Mart, what will become of small businesses and their employees in this country? When every company acts like Best Buy, Home Depot, Barnes and Noble, or Wal-Mart, how will small businesses survive? How will unemployment figures improve?
The answer is that unless consumers change their buying habits and pay a little more for products from local vendors, most small businesses won’t survive, and unemployment will continue to rise at least as fast as the population. While Mark and I pondered this cheery projection, I held back on an even cheerier thought: The Wal-Mart Economy is not sustainable. Obviously, Wal-Mart can’t lower prices forever. Sooner or later, its prices will bottom out at wholesale. When it minimizes human and material costs, it will not be able to reduce prices any more. Then what? How will it continue to meet investor expectations? New products will account for something. But for the life of me, I can’t figure out how it will continue to meet growth projections if it sells everything for 2 cents above cost. If the investors hammer the company when it has record earnings and profits, what will they think when the inevitable slowdown happens?
While I held that thought back, I returned to the lament. If the local guys all are assimilated by direct and mega-merchants, it will have far-reaching effects on our day-to-day lives. Without living wages, who’s going to buy the products the mega-merchandisers sell? Food stamps might help support the Wal-Marts of the world. The government can help those earning below living wages feed their families and buy products at the world’s largest grocer–Wal-Mart. But should we be engaging in this kind of indirect corporate welfare?
Mark, who still runs a small technology service company sans hardware sales, had perhaps the best question of the day: What will happen to the local people who support the products we buy? I was reminded of this the other Sunday when my furnace went out. I called the 24-hour help line, and the owner of the small local company from which I bought the furnace was at my door within an hour. I had heat a few minutes later. What will happen when these people are gone and our appliances–furnaces, stoves, PCs, refrigerators, etc.–go on the fritz? As these become ever more integrated and complex, you would think the demand for local service people would only increase. But that’s not what we have seen. I used to think (and write) that local computer stores and ISPs would survive because people needed this service. Apparently, I was wrong. Rather than fixing machines, we trash them and get new faster, better, and cheaper stuff.
I have no good answers to many of these questions. All I know is that the Wal-Mart economy is not sustainable in the long term. Sooner or later, it will hit the wall. Then we will be left with a shell of our former towns, a huge class of working poor, and landfills full of junk that we can’t afford to fix.
I blurted this out just in time to pull into Mark’s driveway. “Thanks,” Mark said. “Compared to that, I don’t feel so bad that we spent two hours out of the entire weekend on the water and caught nothing.”